Chronic rejection or bronchiolitis obliterans (BO) continues to be the major impediment to long-term survival after lung transplantation. BO is a graft remodeling response to repeated or chronic injury, but the role of graft- as opposed to host-derived cells in the pathogenesis of BO remains to be investigated. We have recently identified in bronchoalveolar lavage from human lung allografts a population of donor-derived or lung resident mesenchymal stem cells (LR-MSCs). We now show that the number of these cells in lavage fluid correlates directly with evidence of allograft injury and predict decline in lung functions (bronchiolitis obliterans syndrome (BOS)). Our preliminary data further demonstrate that LR-MSCs are capable of both inhibiting T cell responses and undergoing differentiation to fibrogenic myofibroblasts. LR-MSC-derived prostaglandin (PGE2) is important as both a paracrine inhibitor of T cell activation and as an autocrine inhibitor of their fibrogenic differentiation. We hypothesize that LR-MSCs participate in lung allograft responses and that their numbers and functions serve as biomarkers which predict the development of BO. We further propose that acquisition of a defect in prostaglandin synthesis and response, a phenomenon promoted by pro-fibrotic milieu, triggers a switch in LR-MSC phenotype from immunoregulatory to pro-fibrotic. The aim of this application is to understand the mechanisms that regulate the fibrotic differentiation of LR-MSCs utilizing our unique ability to study LR-MSCs directly from lung allografts. This application will (1) Utilizing LR-MSCs from normal lung allografts determine the interaction between LR-MSCs (a graft-derived cell which accumulates in response to injury) and local cytokine milieu focusing on the role of PGE2 in this interaction; (2) Using a matched case control study determine whether LR-MSCs isolated from patients with BOS demonstrate an altered phenotype marked by a decreased capacity to secrete and respond to PGE2 leading to an increased propensity towards fibrotic differentiation and; (3) Using a prospective cohort study prospectively determine in human pulmonary allografts whether number of LR-MSCs in BAL and their fibroproliferative phenotypes predict onset and progression of BOS. This application represents the first attempt to study this novel population of graft derived multipotent mesenchymal progenitor cells and will provide important mechanistic insights into their role in adaptive and maladaptive responses to lung allograft injury.